Johannesburg, 5 June 2017: The JSE has listed a cash settled merino wool futures contract on its Commodity Derivatives Market. The contract allows farmers and wool buyers to protect themselves against movements in the wool price. This follows the recently listing of a lamb carcass futures contract which tracks the price of A2 and A3 quality lamb .

The settlement price of the new contract will be determined by the Merino Indicator, an index created by Cape Wool SA. The indicator reflects movements in the price of wool by calculating a weighted average price of a basket of wool sold at a specific wool auction and then comparing it with the result of the previous auction. Wool auctions take place in Port Elizabeth weekly, during the wool growing season.

Chris Sturgess, JSE Director: Commodity Derivatives, says the exchange looks forward to working closely with the wool industry to build a liquid market for the new contract. “When Cape Wool SA approached the JSE about creating a wool futures contract, we were very excited to be able to respond to the needs of another segment within the agricultural sector. The South African wool industry is poised for exceptional growth at the moment and the JSE is privileged to have the opportunity to play a role in helping it to realise its potential.”

Louis de Beer, CEO at Cape Wool SA, says demand for wool is excellent at the moment as global wool production is at a historic low. “The industry is extremely positive about the current opportunity to increase wool production. As we embark on this, the new contract will provide farmers with a mechanism to limit the risks they face related specifically to the price of wool. However, there are also many other role players subjected to price risk in the wool industry, including buyers and processors, who can also benefit from the contract.”

The daily fluctuations in the price of wool can be influenced by several factors, including the demand for wool from Australia and South Africa, exchange rate fluctuations, orders from different buyers as well as the quality of wool on offer. The pattern of wool deliveries is cyclic, with different qualities and quantities arriving at different times during the season, causing the price to fluctuate.

De Beer says the contract can also help participants in the wool industry to gain greater access to finance as it can be presented to banks as collateral, which can further support investments in increasing production. South Africa produced 52,5 million kilograms of wool this year, but De Beer says there is room to increase production by another 22,5 million kilograms. Almost all wool produced in South Africa is exported and the value of trade in the industry amounts to around R4,5 billion per year. South Africa has between 4500 and 9000 commercial wool producers and between 30 000 and 50 000 communal wool producers.

The size of the contract is 1000 kg of clean weighed wool (1500 kg greasy weight). To focus the liquidity of the contract, four hedging months are available for listing on request namely March, June, September and December.

The Johannesburg Stock Exchange is based in South Africa where it has operated as a market place for the trading of financial products for 130 years. It connects buyers and sellers in equity, derivative and debt markets. The JSE is one of the top 20 exchanges in the world in terms of market capitalisation and is a member of the World Federation of Exchanges (WFE) and holds the chairmanship of the Association of Futures Markets (AFM). The JSE offers a fully electronic, efficient, secure market with world class regulation, trading and clearing systems, settlement assurance and risk management.

Hedging means to use an investment instrument to protect yourself against a rise or fall in the price of something – like a currency, share or commodity – you need to buy or sell. Traders make use of futures and options contracts to hedge against these price movements.

Futures derive their value from an underlying asset like a share, gold, maize or wool. This is because these contracts represent a legally binding agreement to buy or sell an asset at a fixed price at a future date. This means that the price or value of a future or option moves up and down with the price of the underlying asset. Options give investors the right, but not the obligation, to buy or sell the underlying asset they represent.

To protect themselves against price movements investors do not need to buy a commodity itself. They can simply buy a future tracking it. For example, the price of wool is currently at R100 per 1000kg, but a wool buyer may believe that is going to increase. To protect himself against this increase he buys a futures contract at this price. Three months later, when the future expires, the price of wool has risen to R120. The wholesale buyer can now sell his futures contract at this price, making a profit of R20. He can use this profit to cover the cost of buying wool at the now higher market price of R120. This means that the higher price of wool does not affect his input costs. ​​